BN 41: Relief from the 40% trust rate of tax for service charges and sinking funds in the private sector

Who is likely to be affected?

1. Private sector landlords with service charges and sinking funds held on trust.

General description of the measure

2. Legislation included in Finance Bill 2007 will extend to all landlords, an existing relief from the special trust rate of tax, for service charges and sinking funds held on trust by Registered Social Landlords and other social landlords. The extension of the relief will apply to income arising on service charges and sinking funds held on trust by private sector landlords in respect of properties situated in the United Kingdom.

Operative date

3. The change will take effect for income arising on or after 6 April 2007.

Current law and proposed revisions

4. Most landlords, be they individuals, partnerships or companies, are required to hold service charge and sinking fund payments, made by tenants and leaseholders, on trust. These funds are commonly invested in interest bearing accounts or other similar investments, and the income arising is chargeable to tax at the special trust rate of 40%.
5. Paragraph 4 (1) (b) of Schedule 13 to Finance Act 2006 provided for an exemption from the full rate of 40% for the first £1,000 of trust income. The exemption was intended to benefit small trusts including service charges and sinking funds held on trust, so where the income from the investment of these funds does not exceed £1,000, it is taxable at the lower rate of 20% instead, with any excess chargeable at 40%. Section 90 of Finance Act 2006 also excluded from the trust rate of 40% income arising from service charges and sinking funds held on trust, in the social housing sector, so that all the income from the investment of service charges and sinking funds is taxable at 20%.
6. The effect of this measure will be to extend the relief currently available to social landlords to all landlords in the United Kingdom holding service charges and sinking funds on trust. Such funds are commonly held on bank deposits and the interest arising will be taxed at the lower rate of 20%. Because most forms of investment income are taxed at source, no further tax will be payable.
7. The Finance Act 2006 provision for registered social landlords was introduced by amending section 686 Income and Corporation Taxes Act 1988. Section 686 has now been replaced by sections 479 and 480 of the Income Tax Act 2007. This replacement legislation will be amended by Finance Bill 2007 to provide for the extension of the relief to private sector landlords.

Further advice

8. The Department for Communities and Local Government, the Scotland Office, the Scottish Executive, the Northern Ireland Office and the Northern Ireland Executive have been consulted on this measure.
9. If you have any questions about this change, please contact Elspeth Fearn on 020 7147 2759. (email: elspeth.fearn@hmrc.gsi.gov.uk). A Regulatory Impact Assessment for this measure is available on the HMRC website.